by Todd Shaver | Dec 30, 2019 | Free Newsletter (Sent Weekly Monday at 12pm)
The Weekly Summary
As the year winds up, the only question left for 2019 to answer is how far back you need to go to get a stronger year. The market this year is close to what we saw in 1998, and we would settle for matching that ultra-bullish dot-com boom. Beyond that, it only takes a few extra percentage points of victory lap before we need to pull out 1975 and even 1958 to find a comparable rally on the books.
Of course BMR stocks are up 41% so far this year, so we're rolling in outperformance either way. A full four of our recommendations doubled, tripled or quadrupled in 2019 and a wide range of others (including mighty Apple itself) are in the 80-95% zone. Only six BMR stocks went down. We're confident that they'll come back strong in 2020.
But then 2020 is the real question Wall Street needs to answer. In our view, the new year will start a lot like the last one, with stocks moving strong to the upside. All we need is a little relief on trade or some sunshine in the coming 4Q19 earnings season to carry the bulls into the summer, at which point the political landscape will undoubtedly get too hot for many investors to handle. That's all right. As long as we stick to our game plan, the election shouldn't hurt us one way or the other . . . and in any event, it's nearly a year down the road, so there isn't a lot of sense in worrying about the results at this stage.
There’s always a bull market here at The Bull Market Report! Gary Jefferson is back with a powerful look at what 2020 is likely to bring us, while The Big Picture focuses on the way markets can swing from dread to exuberance. The rally we're enjoying now isn't any more "irrational" than normal. As such, The High Yield Investor discusses some avenues if you're looking to lock in a little added income before the old year ends. We suggest taking a fresh look at Office Properties Income Trust and Omega Healthcare Investors.
The rest of our paid subscription newsletter is devoted to a few of our biggest winners of 2019 like Anaplan and Alphabet, along with some BMR stocks that fell hard in recent months but are already rebounding fast: Okta, Alteryx and Twitter.
Remember, the last day you can buy or sell stocks this year is Tuesday. Wednesday will be a market holiday and then we start fresh in 2020 on Thursday. As usual, our News Flashes will be a little light this week . . . if there's nothing to say, we won't bore you with filler. Instead, we'll be working behind the scenes to get you ahead of the new year.
Key Market Indicators
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BMR Companies and Commentary
The Big Picture: Animal Spirits In Control
Part of what won Yale economist Robert Shiller the Nobel Prize was his 2005 warning that the housing market was getting unsustainably overheated. Since then, people have come to him to tell the bulls they’ve gone too far. That’s why his recent admission that this record-breaking year on Wall Street is built on irrational factors is so illuminating. Shiller now sees “animal spirits” as the main factor driving what could easily become the best year since the 1950s.
He knows this isn’t logical. And he doesn’t mind. After all, the market isn’t always rational, but when something gets it moving away from the fundamentals, there’s no point in fighting the flow. You’ve simply got to know your own nature. If you aren’t confident enough to run with the bulls, stay on the sidelines and keep cashing 2% Treasury bond coupons. But there’s a lot of money to be made even in a frothy market. Once you let the bulls loose, they’ll run until they’re completely exhausted. Needless to say, we're excited. Even Bob Shiller seems relatively sanguine about how far this rally can continue in 2020 and beyond.
He’s far from alone. Sprawling trillion-dollar asset management complexes are sharing their 2020 outlooks now and they’re convinced bullish conditions will prevail for the foreseeable future. All we need is a mood strong enough to cut through the shocks. Wall Street isn’t climbing a wall of worry any more. We’re riding a wave of exuberance.
It really amounts to market physics. A stock in motion will remain in motion until an obstacle forces a course correction. At this point, there’s nothing big enough looming on the horizon to break the bulls’ stride. We’ve already lived through a year of trade war and earnings deterioration. That’s the status quo now, part of the background noise.
More importantly, it’s already built into the trailing year-over-year comparisons. We don’t need a big external stimulus like tax cuts or even the Fed to get the 2020 numbers going in the right direction. All we need is a little organic growth. That’s been building up behind the scenes as the Fed keeps interest rates low.
Builder confidence is at its highest level since 1999. New home sales are tracking at 2007 levels once again and there’s no ceiling in sight. This is just getting started. And even Bob Shiller, the housing bubble guy himself, has stopped fighting the mood. A year ago, he warned that the housing market reminded him of 2006, right before the crash. Conditions now look hotter than ever.
Shiller says it’s contagious. The impeachment hasn’t stopped it. The trade war hasn’t stopped it. Under normal circumstances, the bulls would have run out of breath by now. But while these aren’t normal circumstances, history shows that they aren’t absolutely unprecedented either. On Shiller’s scale, stocks are “quite high” now at a 30X inflation-adjusted earnings multiple.
Back in 1999, his metrics stretched a full 50% beyond where they are now. History didn’t end. This time around, they can go at least as far before they snap. After all, as Shiller says, we have a motivational speaker in the White House now, someone who loves to talk the market up when everyone else tries to talk it down. That's huge.
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Anaplan (PLAN: $53, down 1% last week )
While Anaplan was down a bit over the past week, it has doubled in the past year and BMR subscribers have captured a healthy 42% of that gain after we added it to the Aggressive portfolio back in March. The company still has significant upside since growth prospects for its decision making software remain bright.
At the forefront of “Connected Planning,” a category that it has created and is a part of the cloud computing category, the technology allows companies to make faster, and, it believes better decisions. Anaplan’s technology, which it calls Hyperblock, connects data through various company’s departments rather than centralizing decision making within the finance department. Currently aimed at large enterprises, there is still plenty of room for growth. At the start of 2019, the company had 1,100 customers and only 250 were part of the Global 2000.
Recent results demonstrate the company’s growth prospects. In the fiscal third quarter (ended October 31), Anaplan’s rapid top-line growth continues, with revenue increasing 44%, from $62 million to $89 million. Although the company has a history of expanding losses, management has slowed down the rate of expense growth. For the most recent period, Anaplan’s operating loss narrowed to $32 million compared to third-quarter 2018’s $50 million operating loss. Management boosted its fiscal 2020 guidance, including raising their revenue expectation to a 44% top-line increase ($347 million) versus their prior 42% expectation, up from $240 million in 2019.
BMR Take: With its pristine balance sheet ($50 million in debt and $310 million in cash), this major disrupter still offers exciting growth prospects as large companies continue to adopt its technology, which includes machine learning and other artificial intelligence. Our Target is $75 and our Sell Price is $45 and we would expect the stock to reach new all-time highs above $60 in the first part of 2020.
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Alphabet (GOOG: $1,352, flat)
The Search giant is up 30% for the year and is within 1% of an all-time record. Not bad for a company with a near-trillion-dollar market cap ($933 billion). The big news recently is that the founders have stepped back and turned over the running of the firm to Sundar Pichai. He’s been running the core Google business since 2015 but this latest promotion gives him a clear line of authority over the entire enterprise.
The search business is solid and obscenely profitable but is not growing terribly fast. Their cloud platform business however rose more than 80% last year, albeit still small at $4.4 billion in revenues. But give this two more years at this growth rate and you have a huge business generating big cash numbers. With revenue tracking near $160 billion in 2019, up from $137 billion in 2018 and $110 billion in 2017, there is nothing but more green ahead for the company.
They are also buying stock back like no tomorrow, with almost $6 billion being spent on shares in just the 3rd quarter. With $120 billion in cash on the books, and generating over $2 billion a month, this type of buying could continue for months if not years into the future. After all, nobody talks about the M-word on the Street, but you have to admit, with 88% of the search market, this company is a monopoly. Is there a risk of the governments of the world getting involved in Google’s business? Yes, of course.
But we think this is highly unlikely and if we didn’t already own stock in the company, we would be happy to acquire shares of this fabulous firm as soon as the market opens for trading on Monday morning. Trading at its all-time high, this concerns us not a bit. After all, why oh why do you think this company is trading at an all-time high? Because it is a cash machine, now and in the future. Our Target is $1450 and our Sell Price is: We would not sell Google.
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Twitter (TWTR: $32.50, up 1%)
What do you do when some of your favorites are down 20-50% from their highs? We go back to the basics.
We continue to love Twitter but the stock has been flat for months now, since October when it was trading in the low 40s. But many times the stock doesn’t tell the whole story. Revenues are good, not spectacular, growing from $2.4 billion in 2017 to $3.0 billion in 2018. This year looks like they will hit the $3.5 billion level, with profits of $1.60 per share in 2018 and what looks like $2.40 in 2019. Compared to a lot of other high-tech companies with virtually no earnings, it’s a nice breath of fresh air to see Twitter actually producing profits.
They still have a ton of cash at $5.8 billion, balancing $2.6 billion of debt. The exposure the company gets from our current president and from the world-changing events that it has been involved in (Arab Spring, Hong Kong) we expect good things from the company in the coming 5-10 years. We see the upside much greater than the downside risk. Our Target of $47 is Aggressive for this $25 billion company and our Sell Price of $25 will protect you on the downside.
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A Word From Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
After digesting dozens of 2020 forecasts from leading Wall Street firms and other outside resources, we want to give you our take on what WE see for the coming year.
First, we don't expect a bear market or a recession. The economy is doing great and it simply is not going to stop on a dime. The things that matter such as consumer confidence, consumer spending, wages, full employment, low interest rates and inflation are at some of the best levels we have seen in our lifetimes.
And the strong economy, of course, is what has and we believe is what will continue to energize the market in 2020. Just look at GDP. The final Q3 GDP estimate of 2.1% puts 2019's annual growth rate on pace to beat the average annual growth rate since this bull market began. Consumer Sentiment was up as well, rising to 99.3 from last month's 96.8.
Even though we key on earnings, if all one did was monitor the following four items, you could accurately forecast the strength of the economy with uncanny precision: GDP, employment, consumer sentiment and interest rates. All are really, really doing well.
Earnings are expected to slow down the first two quarters, but the positive impact from all of the prior rate cuts should hit bottom lines around the midpoint of next year. We anticipate positive growth in the first two quarters and up to 10% earnings growth across S&P 500 stocks for the full year. Thus, if there is going to be a sell-off or "correction," we expect it might be in January or February, triggered more by political consternation than lowered earnings estimates.
If we don't see a pullback early next year, we may have a period of volatility in the June area as politics heats up again with conventions and selections of final candidates. We expect these downswings, if they occur, will be headline-driven events and will therefore result in "buy-the-dip" opportunities for investors wanting to put extra cash to work.
What worked last year: Technology was the clear outperformer in 2019 while Energy was the largest underperformer. As we move in to 2020, we favor Communication Services and Consumer Discretionary stocks (including Amazon) and are not looking for much from either Technology or Energy. However, if Big Oil bounces back, it will come roaring back . . . in that scenario, we'll add to our coverage there.
Either way, as we view the entirety of the economy, tariffs, politics and the Fed, we believe all major sectors are capable of achieving low double-digit returns in 2020, while Consumer Staples, REITs, Utilities and Financials may still be capable of somewhat lower returns.
What we don't expect is smooth sailing throughout 2020. We expect plenty of volatility because of global trade tensions, Brexit and of course politics right here at home. We don't expect the Fed to raise or lower rates next year, but in case the economy needs a safety net, they will lower rates. Oil prices, of course, have always been a wild card, but we see plenty of supply to keep markets stable. We don't expect the president to be removed from office, but rather expect his pro-business policies (less government, fewer regulations and lower taxes) will continue to foster business growth and entrepreneurism.
As a comparison to what we expect, here is the case made by the Stock Trader's Almanac for 2020:
- Worst Case: Correction but no bear in 2020. Flat to single digit loss for full year due to on-going unresolved trade deals, no improvement in earnings and growth weakens further. Trump is removed from office by the Senate, resigns or does not run and political uncertainty spikes.
- Base Case: Average election year gains. Incumbent victory, trade and growth remain muddled, modest improvement in corporate earnings and Fed stays neutral to accommodative. 5-10% gains for DJIA, S&P 500 and NASDAQ.
- Best Case: Above average gains. Incumbent victory, trade resolved, growth improves, earnings improve and Fed stays neutral and accommodative. 7-12% for DJIA, 12-17% for S&P 500 and 17-25% for NASDAQ.
We lean toward the upside.
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The High Yield Investor
As we look toward 2020, most investors have flipped from indulging their grimmest recession fears to a posture closer to our own bullish bias. That's ultimately a good thing. However, it also sets up volatility ahead when expectations get too far ahead of reality, even for a brief period of time. We are looking for good things from the coming year. We just know that the route is going to be far from smooth.
Our top High Yield priority for the coming year is simple: hold defensive positions and wait for money to flow out of these stocks before you expand your holdings. You should have locked in a reasonable quarter-to-quarter income stream to cushion the downswings, so chasing these stocks while yields are relatively low doesn't make a whole lot of strategic sense. The goal is to lock in the highest yields possible, which means waiting until these stocks are out of favor.
It will happen. For now, as long as the rest of the market is rallying, there isn't a whole lot of urgency in building up your defense. And if you're feeling nervous, we suggest capturing the biggest yields you can to offset the impact of negative real interest rates around the world. Remember, the Fed won't raise interest rates again before annual inflation reaches 2%, so locking in anything less for the long term means you're locking in at least a little purchasing power deterioration . . . you are guaranteed to lose money at the end of the road. Who wants that?
Most of our recommendations pay well above 5% and some carry much higher yields as the market pivots from defense to enthusiasm. We'd like to discuss two of our favorites here. The first is ............ AND THIS IS WHERE YOU WILL GET THE BEST VALUE FROM BEING A PAID SUBSCRIBER. GO HERE TO SUBSCRIBE. YOU WILL BE HAPPY YOU DID: www.BullMarket.com/subscribe
Good Investing,
Todd Shaver, Founder and CEO
The Bull Market Report
Since 1998
by Todd Shaver | Dec 23, 2019 | Free Newsletter (Sent Weekly Monday at 12pm), Weekly Newsletter 7pm Sunday
The Weekly Summary
December was chaotic last year, keeping investors glued to their screens as we watched a miserable season turn into one of the biggest rebounds in recent memory. This time around, conditions are unusually quiet as a late Thanksgiving turns into a compressed holiday season. Wall Street is already looking toward the Christmas and New Year breaks. So are we.
After all, Santa came early and often this year. The market as a whole has rebounded 28% YTD, handily recovering all ground lost in the 4Q18 rout and then continuing to push into record territory. The S&P 500 has now rallied a healthy 12% past last year's peak, with more than half of that surge coming in the last four months. Whether the motive is relief that we've skirted another year without a recession or more straightforward optimism, the mood is as good as it gets.
If anything, we're inclined to urge a little caution here. When a full 44% of investors are actively bullish and the so-called "greed index" flashing at extreme levels, this is as good a time as ever to take a little profit and rotate the returns back into stocks that haven't flown as far as the rest of your holdings or offer a comparable return for lower risk. The perfect time to buy was a year ago when everyone but us was terrified that the trade war and the Fed had triggered the end of the world. While today this is not an awful entry point, a selective approach can be your friend here . . . we would definitely not pour money into index funds right now.
After all, while the active BMR universe is up 42% so far this year, our stocks have tangible growth on their side. Earnings for the S&P 500, on the other hand, have spent the entire year in a stall, so there's no compelling mathematical reason for the index to keep moving up without straining historical multiples to the bubble point. Right now the market as a whole carries an 18X earnings multiple, well above the 15-16X that investors have normally been willing to pay.
In exchange for those inflated fundamentals, investors are getting negative growth. Those companies are actually tracking lower earnings than they did a year ago, and are likely to keep deteriorating at least into the 4Q19 reporting season. After that, we'll simply have to see if the combination of lower interest rates and a truce in the global trade war shakes a little growth free. If not, stocks will look increasingly vulnerable to any external shock to sentiment . . . the higher the multiples get, the more precipitous the fall from grace becomes.
However, there's a lot to be said for a sympathetic Federal Reserve and any relief from the trade war. The White House estimates that even Phase One in a deal with China coupled with a new NAFTA accord will boost GDP growth 0.5% in the coming year, which is enough to drive a so-so economic expansion into something approaching spectacular. It's definitely far from the recession zone that everyone was worried about a few months ago.
You need growth to decline in order to realistically talk about recession ahead. No decline means no recession. And no recession means people who retreated to the market sidelines are now having a hard time resisting the urge to get back in before they miss out completely.
Remember, while earnings haven't moved up in the past year, they haven't dropped a lot either. The trade war has delayed a lot of new corporate investment initiatives without driving executives to pull the plug on any established cost centers. We haven't seen mass layoffs. No sprawling Financial conglomerates or prominent hedge funds have imploded the last time the Treasury yield curve briefly inverted.
And that curve is healthier than a few months ago. Barring a lot of dread around the coming election, the rate environment once again reflects lower risk in the short term and higher uncertainty farther out into the future, exactly as it should. The Fed has done its work well. Investors have a reason to cheer.
So what can go wrong? While we are always quick to accentuate the positive, we also acknowledge that other investors make errors when the mood swings too far in either direction. Expectations can get stretched to unsustainable levels, setting up the next inevitable round of disappointment, second guessing and nervous selling. That's ultimately a good thing for those of us who have been watching and waiting for a chance to buy great stocks on the dip. Throughout our career (collectively well past a half century actively in the market) the long-term trend always points up and the dip is always worth buying.
There’s always a bull market here at The Bull Market Report! Gary Jefferson has the week off and with the holiday approaching, we decided to use his absence to try something new with an in-depth review of Todd's Stocks For Success. We hope that you come away from this issue with deeper understanding of why our founder likes Berkshire Hathaway so much. He would buy any of these stocks on weakness.
Finally, a scheduling note ahead of the Christmas holiday. The market will close early on Tuesday and stay shut until Thursday morning, so news will be light and our News Flashes will probably taper off a bit. We'll use the time to reflect on the year that's gone and cement our thinking on the year ahead. Ideally we'll also be able to update the site a little and perform other housekeeping as we get the portfolios in position for 2020. We'll be in touch either way, but as always, we wish you a happy holiday and the best possible experience as an investor.
Key Market Indicators
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BMR Companies and Commentary
The Big Picture: Big Rally, Narrow Bench
While the last few months have been great for the S&P 500 and our stocks as well, the gains remain restricted to a narrow field of relatively safe bets. Investors simply aren't thinking outside the box right now. They're content to park their money in a few big stocks that don't require a lot of patience or even conviction. While we'd love a little of that capital to flow immediately to a few of our smaller and more neglected recommendations, we don't mind in the slightest.
For one thing, we already recommend many of the leaders. Just seven BMR stocks account for 40% of the S&P 500's gains for the past quarter, and Apple (AAPL: $279, up 2%) alone contributed almost half of that upside. If you weren't bullish on Apple in the last few months, you missed the boat. We were right to keep the giant in our sights, and it gave us everything we hoped to see. Apple has surged a full 77% this year, recovering $700 billion in market capitalization along the way.
Microsoft, Alphabet and to some extent Facebook, Berkshire Hathaway, Johnson & Johnson and Visa also contributed a significant amount to the market's gains in the last few months . . . not to mention the year as a whole. Big stocks got big because the enterprises driving them were some of the most dynamic companies around. This year, they got even bigger. All are hitting all-time highs. How far can they go before taking a break? We'll simply have to see, but as long as earnings keep outperforming everyone else around, the stocks have all the room they need.
Then there's Amazon (AMZN: $1,787, up 1%), which is as dynamic as ever but the stock hasn't gone anywhere in the last quarter. It's also down 12% from its peak, so there's no sense of straining any kind of historical limit. When investors come back, this can once again be a $2,000 stock and a trillion-dollar company. And in that scenario, the S&P 500 gets enough of a boost to break another record. No other stock has to do any work. Amazon can do it on its own.
We see that story play out again and again. A full 3 in 5 S&P 500 constituents are actively lagging the market and the lower you go on the market food chain, the rarer true leadership gets. A staggering 85% of the stocks on Wall Street have underperformed the S&P 500 this quarter. Most are doing okay. True losses are limited. They're simply getting left out.
But the market will never tolerate an imbalance for long. Sooner or later, one or more giants will hit a wall and the money that's flowing to them now will rotate into smaller stocks. When that happens, we'll have a reason to cheer. On average, our recommendations are still down 12% from their 52-week highs, let alone lifetime peak levels. We've come a long way back in the last few months without even clearing what are still formally correction conditions from late in the summer, when Technology took a huge step back. There's money to be made here.
Look at Roku (ROKU: $137, up 3%). It's up close to 350% YTD but is 22% off its peak. That's an opportunity. Even though a handful of giant companies are doing most of Wall Street's work, plenty of smaller names keep breaking records as well. Splunk (SPLK: $151, up 5% this week), for example, is once again within sight of an all-time high, set in early December, capping a year that's literally run rings around the market as a whole. This stock has gained 44% YTD but the ride has been wild. We've seen it plunge from above $140 to below $110 twice this year, so the moral here is to hold on tight through the retreats.
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Berkshire Hathaway (BRK-B: $226, flat last week but setting an all-time high)
This stock is a must-own. If you believe in America, then Berkshire is the place to put your money where your mouth is. The stock is worth $553 billion, making it one of the top 10 largest companies in the world. Do you want to know what they do? Well, here it is, straight from Yahoo Finance. Breathe it all in:
Berkshire Hathaway Inc., through its subsidiaries engages in insurance, freight rail transportation, and utility businesses. It provides property and casualty insurance and reinsurance, as well as life, accident, and health reinsurance; and operates railroad systems in North America. The company also generates, transmits, stores, and distributes electricity from natural gas, coal, wind, solar, hydro, nuclear, and geothermal sources; operates natural gas distribution and storage facilities, interstate pipelines, and compressor and meter stations; and holds interest in coal mining assets. In addition, it offers real estate brokerage services; and leases transportation equipment and furniture. Further, the company manufactures boxed chocolates and other confectionery products; specialty chemicals, metal cutting tools, and components for aerospace and power generation applications; flooring, insulation, roofing and engineered, building and engineered components, paints and coatings, and bricks and masonry products, as well as offers homebuilding and manufactured housing finance; recreational vehicles, apparel products, jewelry, and custom picture framing products; and alkaline batteries. Additionally, it manufactures castings, forgings, fasteners/fastener systems, and aerostructures; titanium, steel, and nickel; and seamless pipes and fittings. The company distributes newspapers, televisions, and information; franchises and services quick service restaurants; distributes electronic components; and offers logistics services, grocery and foodservice distribution services, professional aviation training programs, and fractional aircraft ownership programs. In addition, it retails automobiles; furniture, bedding, and accessories; household appliances, electronics, and computers; jewelry, watches, crystal, china, stemware, flatware, gifts, and collectibles; kitchenware; and motorcycle accessories.
Here are the company’s top five holdings:
Apple
Comprising 24% of the Berkshire Hathaway portfolio, Apple represents Buffett's largest holding, with a whopping 250 million shares in the tech giant, as of November 2019. Currently worth approximately $65 billion, in 2018, Apple surpassed Wells Fargo to capture the #1 spot after Berkshire Hathaway purchased additional shares of the Steve Jobs-founded company in February of that year.
Bank of America
Warren Buffett's second-largest holding is in Bank of America, valued at $27 billion and comprising 13% of his portfolio. Buffett's interest in this company began in 2011 when he helped solidify the firm's finances, following the 2008 economic collapse. Investing in Bank of America, which is the nation's second-largest bank by assets, falls in line with Buffett's attraction to financial stocks, including Wells Fargo & Company and American Express (see below).
The Coca-Cola Company
Buffett once claimed to consume at least five cans of Coca-Cola per day, which may explain why the Coca-Cola stock is his third-largest holding. But one thing is for certain: Buffett appreciates the durability of the company’s core product, which has remained virtually unchanged over time, with the exception of the ill-fated "New Coke" formula rebranding, in the mid-1980s. This makes sense, given that Buffett started buying Coca-Cola shares in the late 1980s, following the stock market crash of 1987. Presently with 400,000,000 shares, valued at $22,000,,000,000, Coca-Cola accounts for 10% of the portfolio.
Wells Fargo
At 9% of his portfolio, Buffett currently holds shares valued at over $19 billion. Although this is Buffett's fourth-largest position, Wells Fargo previously occupied the top slot for many years. A series of scandals that began in 2016, including the creation of millions of dummy bank accounts, unauthorized modifications to mortgage plans, and the fraudulent sale of unnecessary car insurance, has hurt the bank's reputation.
American Express
This company is the third financial services company to make Buffett's top five list, occupying 8% of the portfolio. Valued at nearly $18 billion, Buffett acquired his initial stake in the credit card company in 1963, when it sorely needed capital to expand its operations. Buffett has since been a savior to the company, many times over, including during the 2008 financial crisis. With 12.5% average annual return over the past quarter-century, American Express has proven to be a valuable asset.
We’d like to say THEY COVER IT ALL. Again, if you believe in America and free enterprise, you might just want to buy one share of the A series – it’s only $340,000 per share! (A good friend of ours used to call us up at the office back in our Morgan Stanley days in the 1990s and would leave a message: “I just called to place an order for 100 shares.” That’s when the stock sold for $35,000 a share, so 100 shares was worth $3.5 million. He thought this was hilarious! Well, how about now? 100 shares is worth $34 million! HAHA.
What’s the point about all of this hilarity? Get a piece of this company. 10 shares. 100 shares. 1000 shares. Whatever you can afford. You’ll never regret it. Our Target of $230 is about to be breached. We hereby raise it to $255. Our Sell Price remains the same: We would not sell Berkshire Hathaway.
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Good Investing,
Todd Shaver, Founder and CEO
The Bull Market Report
Since 1998
by Todd Shaver | Dec 16, 2019 | Research Report
Agilent (A: $84)
Coverage initiated December 16, 2019 at $84 in the HEALTHCARE portfolio.
Note: Current Target and Sell Prices are displayed in the Portfolio. Type the TICKER SYMBOL or COMPANY NAME into the search box (top of page) for all Bull Market Report coverage of any given stock.
Company Overview. Agilent is a Healthcare company that was spun out of Hewlett-Packard in 1999. At the time, it was the largest IPO in Silicon Valley history. The company improves the laboratory workflow by providing analytical instruments, software, and various other services that enhance quality and efficiency. The company also provides lab management services, including asset management, equipment management, laboratory business intelligence, software maintenance, and genomics and cloning.
Business Model. Management divested the company of several underperforming business lines during the early 2000s, when economic uncertainty reduced demand for Healthcare products. The company subsequently sold its semiconductor business to private equity companies for nearly $3 billion. The company also sold off its Healthcare and medical products divisions to Phillips Medical Systems for $11 billion. The dual-sales effort was part of a strategic decision to concentrate more fully on the laboratory test/measurement business.
Since 2010, the company has grown its core business line through both innovative product offerings and strategic M&A activity. Luxcel Biosciences, Lasergen, ProZyme, Genohm and Advanced Analytical Technologies are just some of the acquisitions the company has made in 2018 alone. Clearly, management has a growth strategy predicated on purchasing strong, nascent companies that enhance the product line and help attract and retain customers.
Competitive Analysis. Healthcare is a vast sector, with many large subsectors full of competing organizations. As a laboratory workflow manufacturer, Agilent occupies one of the more niche areas of Healthcare. Prominent and publicly-traded competitors include Thermo Fisher Scientific, Abbott Labs, Bruker Corporation, Shimadzu, ULVAC Technologies and Bio-Rad. Thermo Fisher and Abbott are by far the largest players in the space, with 70,000 and 100,000 employees, respectively. Thermo Fisher has a $130 billion valuation, and Abbott has a $150 billion valuation. By comparison, Agilent has about 16,000 employees and is valued at $26 billion.
That said, Agilent is the third-largest player in the space. It’s worth noting that both Abbott’s and Thermo Fisher’s revenue and net income have been soaring over the past couple of years. Abbott’s revenue rose 50% from 2017-2019, to $31 billion, and net income rose from $480 million at the start of 2018 to $2.4 billion at the beginning of 2019. Thermo Fisher’s revenue grew 30% in the two years from 2017-2019, and its net income rose 50% during that same time, to $3 billion.
The revenue and net income growth of the two major players in the space is a strong sign for the broader laboratory workflow sector, as it implies a robust demand for the products and services that the sector provides. Also, a rising tide lifts all boats, and as the third-largest ship in this ocean, Agilent is poised to benefit from both Abbott’s and Thermo Fisher’s rapid growth.
Financial Analysis. Agilent has strong financials. 3Q19 (which was the company’s fourth quarter) came in robust, with revenue of $1.3 billion up 6% YoY. Earnings were almost $200 million. Fiscal year revenue of $5.2 billion grew 5% YoY, and EPS of $3.37 was up a whopping 250% YoY. The company is guiding next year’s fiscal year revenue at 4-5% growth once again, and earnings guidance is expected to tick up slightly, as the company ramps up its M&A and sales and marketing efforts to continue to grow.
The company has a market cap of $26 billion, with cash of $1.4 billion and debt of $2.4 billion. That’s not bad for a Healthcare company, which generally assumes high levels of debt. All that cash has come by way of the company growing earnings at an average clip of 17% per year over the last three years. Revenue has been growing at 8% over that same time frame, and management has done an excellent job of keeping operational costs down.
Stock Performance. The stock has performed in-line with the broader market this year, up 27% YTD. The 1% annual yield puts it right on the S&P’s YTD return. The stock is currently at its all-time high. Yet this is clearly the brightest point in the company’s history, as Agilent spent a good chunk of years disposing of underperforming business lines and ramping its core laboratory workflow business. The company is in terrific shape today, and its spate of mergers and acquisitions illustrate the strong financial and fundamental position of the company. Management is dead-set on growth, and has the cash on hand to continue to fulfill its M&A strategy. The stock has reflected the excellent forward-looking prospects for this company.
Agilent is mainly held by institutional investors like T. Rowe Price, BlackRock, Fidelity and Vanguard. That’s a good sign, as heavy hitters in the Financial Analysis space are on board with the stock. The stock even got a boost recently when Bill Ackman’s Pershing Square announced a purchase of nearly 3 million shares, with the distinct possibility of future buy-ins. Ackman is a legendary hedge fund manager, so his investment into Agilent really means something.
BMR TAKE: Agilent is a growing company in a growing sector. The financials are strong, with solid revenue and earnings growth year-over-year. On top of that, management’s M&A strategy is accretive, and shows that the company is willing to improve its products and services by purchasing rising stars in the sector and absorbing them and synergizing the costs. The growth of both Abbott Labs and Thermo Fisher shows how popular the sector is, and what high demand exists for laboratory workflow companies – and that spells great news for the third-largest player in the space, that continues to make proactive strategic growth decisions.
What’s more, the recent investment by Bill Ackman, which only adds to the laundry list of institutional brand names aboard this stock, signals confidence by some of Wall Street’s best investment professionals. While not a reason to invest in a stock alone, it’s good to know that major hedge funds and investment firms are participating in the Agilent growth story.
Management has steered this company through some tough times, disposing of key business lines, reducing staff, and guiding the company through the pressure of a low-demand climate. Demand for laboratory services is growing, and management is intent on growing the company to take advantage of the boom times. We’re expecting big things from this stock next year as a result.
